Diageo issues bullish trading update

Diageo pleased its shareholders and the stock market today by issuing a bullish trading update, forecasting organic operating growth of at least 14% in the year to the end of next month.

The world’s biggest producer of premium beverage alcohols said that its organic operating growth should be slightly ahead of net sales growth for the year ending 30 June. As a result, the company’s shares gained 2.8% in early trading in London.

As regularly reported by the drinks business, all the global drinks groups have issued strong figures in recent weeks, with today’s from Diageo’s being the most positive.

Given that its organic growth in the six months to the end of December was just 1% as it began recovery from the ravages of the coronavirus, the company’s prediction indicates an excellent performance in the past few months.

The company said that it was “enjoying a good recovery across all regions”. In its largest and most profitable market, North America, “our performance has remained particularly strong, reflecting resilient consumer demand, the breadth of our portfolio and the effectiveness of our marketing and innovation.”

“In Europe, we are benefitting from strong execution in the off-trade channel and the partial re-opening of the on-trade channel in certain markets.

“In Africa, Asia Pacific and Latin America and the Caribbean, we are seeing a continued recovery in most markets, despite the ongoing impact from Covid-19.

Significantly, while competitors have continued to warn of the possible impact on trade from a resurgence of Covid later this year, Diageo did not feel the need to do so other than to note that global travel retail remains “heavily affected”.

The company also announced that the £4.5 billion share repurchasing scheme to return capital to its shareholders has been restarted and will be extended until June 2024.

It was halted last year in the face of Covid-19 after having paid out an initial £1.25bn. A further £500m will be repaid by the end of this year.

The fact that last year Diageo maintained its dividend payout last year raised some eyebrows about its ability to do so without raiding its reserves, but its latest trading information and the revival of the share buyback programme shows those questions were unjustified.

Diageo said that its £4.5 billion return of capital program will be completed by 30 June 2024, adding that it had to be extended two years because of the effects of the coronavirus pandemic.

Ivan Menezes, Diageo’s Chief Executive, said: “I am very pleased with how our business is recovering in fiscal 21, our strong competitive performance across key markets and our robust cash generation.

“Our disciplined approach to capital allocation is unchanged. Our priority remains to invest in the business to deliver sustainable and efficient organic growth and to pursue acquisitions that further strengthen our exposure to attractive categories.”

Already this year Diageo has bought Far West Spirits in the US, Sons of Liberty Spirits (producer of Loyal 9 Cocktails), and has completed its purchase of Herefordshire-based Chase Distillery. All were for undisclosed sums.

Menezes continued: “When we have excess cash, we have been clear that we will seek to return it to shareholders.

“The board’s decision to resume our return of capital programme at this time reflects Diageo’s improved performance in the first half of fiscal 21, the continued strong recovery of our business, and our expectation that we will be back within the top end of our target [debt] leverage ratio of 2.5 to 3.0 times at 30 June 2022, post completion of the second phase of the return of capital programme.

“We are confident that Diageo will continue to execute effectively in this challenging environment and will emerge stronger.”